Whether you’re making a career change, or you have just been laid off, managing your 401(k) plan may be at the bottom of your to-do list. However, moving your 401(k) plan is an incredibly important step that must be carefully planned. When leaving one employer and starting with another, there are typically three workable opportunities for ensuring the continued growth of your retirement funds. Understanding which option offers the most advantages and aligns with your next chapter in life is the first step.
First, read through your new plan’s agreement. This will help you understand whether your new employer’s plan accepts rollovers, as some do not. Ultimately, plan sponsors maintain the membership guidelines. In some cases, your former employer’s plan may allow the sponsor to cash out the account when you end your employment. Withdrawals could trigger income taxes and a 10% penalty.1
Next, gather any appropriate account statements and contacts’ details. When you signed up for the plan, you may have selected both a traditional 401(k) and a Roth 401(k), but keep in mind that these are two separate accounts. Traditional 401(k) contributions are not taxed but are subject to penalties in the case of early withdrawal. Roth contributions, on the other hand, are taxed, but withdrawals have no adverse effect as long as the distribution qualifies according to the IRS.2
It’s a good idea to meet with a financial advisor before starting the process. You‘ll want to choose the right type of retirement account and avoid paying taxes or penalties for potentially choosing a plan that isn’t right for you. For example, if you decide to roll your 401(k) into a Roth, you should prepare to pay taxes on the full amount.
A financial advisor can help you make informed decisions as you continue saving. We offer assistance by reviewing your previous employer’s plan and weighing the benefits of your new employer’s retirement plans. More importantly, we will make sure the necessary steps are taken to move your funds with limited repercussions.
If you leave money in your previous employer’s plan, it’s a good idea to have an advisor review the plan’s progress over time. If you decide to transfer funds, the previous plan’s administrator can often send the check to a designated contact. Working with your advisor will be beneficial as they can coordinate such transactions.
Depending on the duration of your previous employment, it may be worthwhile to check the associated vesting schedules. Vesting schedules are tied to the employer’s contributions and determine the amount and date when the employer’s contributions are legally yours. Your own contributions are fully vested from day one.
Age is another contributing factor when deciding how to approach a former employer’s 401(k) plan. For instance, if you quit a job, are laid off, or are fired the year you turn 55, you may withdraw funds penalty-free from the 401(k) plan established through that employer only.3 If you choose to roll the funds over into another 401(k) plan or an IRA, you will need to wait to withdraw those funds until the age of 59½ to avoid the 10% withdrawal penalty. In addition, this penalty-free withdrawal does not apply to 401(k) accounts established through previous employers; it only applies to the account established with the employer you leave when 55 or older. If you’re unsure about which options may be right for you, talk with a financial advisor to help ease your concerns and avoid costly mistakes.
Also, keep in mind that your new employer may have a waiting period in place, meaning that you may need to wait before rolling over funds. In this case, we may suggest opening an investment account to continue contributions during the waiting period. Opening another account allows you to take advantage of the tax deduction until you make your final decision. Keeping investment growth active could be more beneficial for you in the long run.
When transferring from one employer to another, there are many things to consider, and managing your 401(k) plan may not be a high priority. However, by working with a financial advisor, you can gain further knowledge about and understand the regulations associated with moving your funds in the most beneficial way. We can also help with navigating any changes you may encounter in the future.
Fox Financial Group
If you are getting ready to switch jobs or think that a career change could soon be on the horizon, we would be delighted to assess your situation and get you into the retirement account that best suits your goals. You can contact us at firstname.lastname@example.org or 636-534-7252 and/or subscribe to our monthly newsletter.